What: American fertilizer manufacturer CF Industries Holdings, (NYSE: CF) stock shot up 11% early this afternoon (July 17). This corresponded with the publication of an article on the Wall Street Journal's website speculating on rumors that CF Industries was in talks with Dutch competitor OCI NV to merge.
So what: CF Industries is more than twice as large as OCI by market capitalization, and there is speculation that if the two were to merge, it would be a so-called "inversion," where the combined company would be based in Holland. The idea behind inversions is simple: Pay less taxes. With Holland's corporate tax rate being lower, this move would essentially put more profit on the bottom line, without really altering the structure of the company's operations.
Now what: Even if a merger -- and remember that it's all speculation -- happens, there's no promise that there would even be a corporate inversion. This is especially true if the company were to have a larger part of its operations in the U.S., complicating the matter and making it much harder to justify being based outside the country.
There's also a high likelihood that the big run-up in shares that's already happened means little chance for opportunistic trading.
In other words, jumping in at this point would put investors at risk from several angles:
- No merger happening and shares losing value quickly.
- A merger but no inversion -- also likely to deflate CF's share price.
Basically, buying shares on this news -- really just rumor at this point -- is more like rolling the dice. There's nothing that gives us any new material insight into the business itself, but we have a lot of added uncertainty that's going to affect the stock in impossible to predict ways in the days and weeks ahead. Probably best to stay on the sidelines until the uncertainty clears up. Only those with insider knowledge have any idea how this will play out, and last I checked, it's a felony to trade on that knowledge...